Rates, Prepays and Consumer Stress: What the Data is Telling Us at the Start of 2026
Register here for next month’s call: Thursday, February 19th, 2026, 1 p.m. ET.
In the January Models & Markets call, our quantitative modeling team hosts their first monthly deep dive of the year into prepayment model performance, an updated analysis of second liens and HELOCs using Equifax data, and the evolving macroeconomic backdrop shaping mortgage markets.
Here’s a quick recap in case you missed it.
(Click here for the entire 20-minute recording or continue reading for a summary.)
Revised HELOC and HEL Results Using Equifax ADS Data
We performed a comprehensive analysis of second liens and HELOCs using Equifax’s Analytic Data Set (ADS), which represents a 10% anonymized sample of U.S. consumer credit data at the tradeline level.
Following the resolution of data quality issues identified in an earlier analysis, the revised results now align much more closely with economic intuition. Prepayment speeds behave consistently across vintages, credit score bands, and refinancing regimes.
One key takeaway holds that higher credit score borrowers tend to prepay faster, particularly during refinancing waves, while lower credit score segments remain slower. This pattern is especially evident in post-COVID vintages. Overall credit quality for HELOCs and second liens remains strong, with performance clustering closer to the highest credit score bands.
Another notable observation is the role of seasonality in newer HELOC vintages. In a high-rate environment with limited refinancing activity, turnover-driven prepayments become more prominent. Baseline prepayment speeds for HELOCs are running around 15 CPR, higher than what is typically observed in first-lien portfolios under similar conditions. These dynamics provide useful signals for understanding how first-lien behavior may differ when second liens or HELOCs are present on the same property.
We plan to expand this analysis further, including deeper investigation into correlations between first- and second-lien prepayment behavior.
Mortgage Rates Remain Likely to Stay Higher for Longer
The broader economic outlook remains one of persistence rather than relief. Federal Reserve projections point to unemployment stabilizing around the low-4% range and real GDP growth near 2% over the medium term. Meanwhile, expectations for the fed funds rate suggest limited room for significant cuts beyond 2026.
Longer-term rates tell a similar story. Consensus forecasts indicate the 10-year Treasury is unlikely to fall meaningfully below 4% over the next two to three years, implying mortgage rates are likely to remain near (and potentially above) the 6% level for much of the period ahead. Temporary dips tied to policy announcements or market events have proven short-lived, with rates quickly reverting back toward recent levels.
Consumer Stress Continues to Build
While headline spending remained strong during the most recent holiday season, the composition of that spending tells a more cautious story. Consumers increasingly favored lower-cost retailers, suggesting budget sensitivity and selective spending behavior.
Survey data reinforces this theme. Year-over-year consumer sentiment and expectations have declined meaningfully, and perceptions of job insecurity (particularly among college-educated workers) have become more negative. These dynamics could have important implications for credit performance and housing activity as economic uncertainty persists.
Prepayment Model Performance: v. 3.7 Continuing to Track Market Performance Well
RiskSpan’s prepayment models continue to perform well across Agency collateral.
RiskSpan’s Prepayment Model v3.7 continues to demonstrate strong performance across collateral types. Recent back-testing shows that model projections remain closely aligned with realized speeds, even as seasonal effects and calendar nuances influence month-to-month results.
For conventional 30-year loans with lower coupons, December’s modest uptick in observed CPRs was largely attributable to four additional collection days relative to November. After adjusting for day count effects, actual prepayment speeds continue to trend lower, consistent with expectations in a higher-rate environment.
Premium cohorts also remained largely stable. Despite a brief decline in mortgage rates late last year, the move was insufficient to trigger a meaningful new refinance wave. Most refinance-eligible borrowers have already acted, and the refinancing “pull-forward” effect appears largely exhausted. This dynamic is also visible in the S-curve, which has flattened back toward historical averages after October’s temporary acceleration.
Agency collateral shows similar patterns. Ginnie Mae discount cohorts tracked model expectations closely, while premium cohorts remained flat. One area of ongoing refinement is deep in-the-money, very high-coupon Ginnie Mae loans, where actual speeds have run slightly slower than model projections as refinance incentives flatten out earlier than in prior cycles.
Looking Ahead
In summary:
- RiskSpan’s Prepayment Model v3.7 continues to perform well across most collateral segments
- HELOC and second-lien analysis using Equifax data now shows economically intuitive and stable results
- Mortgage rates are likely to remain near 6% in the absence of a major macro shock
- Consumer behavior is showing increasing signs of stress and caution
- RiskSpan plans to release additional analytics later this year, including a new non-QM credit model in the first half of the year and a next-generation prepayment model in the second half.
We continue to add additional analytics reports on the Platform. Please visit www.riskspan.com/request-access to request free access.
As always, please feel free to contact us to discuss or learn more.
